The other side of the retirement challenge myth
In recent times, we have all heard of the myth that the reason for South Africa’s overall poor retirement rate (defined as the number of people who can retire with a comfortable nest egg) is the result of a poor savings rate within the country. While this may be a contributing factor, I feel that there is much more to this challenge than this phenomenon.
South Africans are not hard-wired to save
Please do not misunderstand me; I am not a denialist. I am fully aware that there are people driving around in Audi TTs with a Toyota Tazz budget and there are people in South Africa who largely live on credit.
This is a common trend displayed in the recent Sanlam Benchmarks Survey. Kobus Hanekom, Head: Strategy Governance & Compliance at Simeka Consultants and Actuaries, points out that when researchers asked a focus group of retired people what advice they would give to younger people, almost all of them said: save / start planning / invest from a younger age.
Financial advisers know this behaviour only too well. They do some initial planning in terms of a retirement annuity, but clients can’t afford to pay whatever they need to pay because there is always something that tends to get more attention like small children, a bond, a car repayment, or the good things in life that they want to buy and benefit from first. After all of this, they look at retirement.
“When clients reach 55, some of them suddenly want to contribute more in the last 10 years of their life and that may be too late,” says Hanekom.
This is true in some aspects and a bit unfair in others. Hanekom points out that issues such as small children, a bond, and a car repayment prevents people from focusing on retirement. So must we expect our clients not to have children until they retire, become first time homeowners at the age of 60 and depend on public transport all for the sake of a comfortable retirement? I agree that living like a king on a pauper’s budget is not doing your client any favours, but your client also needs to live their life before retirement. Life unfortunately doesn’t begin at 60.
Employer contributions
Here is the other side of the coin I was referring to earlier in the article. If we want to make an educated assumption about why South Africans cannot retire comfortably, we need to look at the whole retirement process.
Here is a message that we do not hear that often, Danie van Zyl, Head Guaranteed Investments Sanlam Employee Benefits, points out that the Benchmark Survey found that the average employer contribution, as a percentage of salary, amounts to 10.36%, which is below last year’s rate of 11.09%.
Similarly, average employer contributions for union funds amounted to 9.6% of salary, significantly down from 10.89% in the 2015 survey.
Twenty five percent of employers allowed members to vary their employer contributions in terms of a package restructure arrangement, in line with 23% of employers in the 2011 survey.
Now surely this must be just as big a contributor as the non-saving debate?
Employee contributions
In contrast to the lower employer contribution rate, the average employee contribution rate increased to 7.27% of salary, compared to 6.46% of salary in 2015. Now how can we say that South Africans are not hard wired to save when we read this statistic?
Van Zyl adds that the average employee contributions for union funds amounted to 6.32% in 2016. In 2015 this was 6.66%, and in 2014 this was 5.93%.
Twenty six percent of funds allow their members to choose their own employee contribution levels, broadly in line with the 2013 survey result when 29% of funds allowed this. Eighty seven percent of funds allow members to make additional voluntary contributions, up from 69.5% in 2011. The average additional voluntary contribution for these funds (as a percentage of salary) is 1.65%.
The role of the adviser
I am not rubbishing the reports that South Africans are not hardwired to save. I am merely saying that there are other actors in this drama that deserve their own chance in the spotlight.
What is clear is that there is a dire need for significant financial planning in the country. Advisers cannot be product pushers, they need to sit with clients and show them how to budget and how to plan ahead for life events such as children, buying a house or buying a car. Hanekom is right in saying that these things do affect retirement savings, but they cannot put a complete hold on them.
Editor’s Thoughts:
I often quote San Tzu, and this quote is very applicable to the journey towards a comfortable retirement. Know your enemy and know yourself and you can fight a hundred battles without disaster. If we know what challenges we face on the journey towards retirement, we can make the appropriate behavioural changes to overcome these challenges. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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